Key takeaways
In a rug pull scam, a team of developers or crypto project creators drives up the value of their token before dumping their holdings at an excessive price or extracting liquidity.
Rug pulls typically follow one of three patterns: mass selling of tokens, theft of liquidity, and issuance of unsellable tokens.
If you have been a victim of a rug pull, report the situation immediately to the appropriate law enforcement agencies and the Binance customer service team.
Discover the signs of a rug pull scam and learn how to protect yourself from them in today's article in our How to Survive Scams series.
The rug pull is a common scam in the crypto world. It involves creating a fraudulent token, increasing its value to attract buyers, then fleeing with investors' money once the token has reached a record price. Such scams can easily bankrupt cryptocurrency investors, who are left with assets that are simply worthless.
This article in our How to Survive Scams series details the mechanics of a rug pull and gives you the essential weapons to identify and avoid them. Before we dive into how these scams work, let's first look at the three main types of rug pulls.
Want to know more about other scams crypto enthusiasts can fall victim to? Find our full series of articles here.
The three main types of rug sweaters
All rug pulls follow the same logic: increase the value of a token and steal investors’ money. However, there are several methods of execution to achieve these ends. Here are the three most common types of rug pulls that can target any crypto investor.
1. Create an attractive token, then get rid of it
Scammers create tokens with fabricated values, then convince investors that they will receive high returns while holding the majority of the number of tokens. Once the price reaches a certain level, the so-called “project team” sells all of its tokens and causes its price to drop dramatically.
2. Stealing liquidity
To exist and be traded on decentralized exchanges, crypto projects need a liquidity pool, that is to say a large pot of funds locked in a smart contract. The scammers attract the first contributors to this liquidity pool before withdrawing all the funds.
3. Create a token that is impossible to sell
This method is based on a simple line of code which, once activated, prevents investors from selling their tokens. When enough retail investors buy the token, the so-called “project team” activates this line of code and disposes of their positions.
Mechanisms of rug pulls in the crypto universe
Here are the details of the tactics common to all types of rug pull.
1. Create an attractive project
Scammers start by launching a new crypto project that will attract as many potential investors as possible on social networks such as Twitter/X, Instagram or Discord, often promising high returns and using flashy marketing techniques to generate excitement. for their token.
2. Covering up the truth and baiting victims
As soon as the first investors begin to pour funds into the “project”, the criminals try to give the illusion that it is moving forward by publishing news, listing the token on exchanges or even pretending to collaborate with renowned companies. These partnerships are often entirely disingenuous or have no real value. Generally, none of these announcements and measures are true, and everything is just a web of lies intended to attract more investors and drive up the price of the token.
3. Finalize the rug pull
When the token has reached a certain price or, in the case of a liquidity pool rug pull, raised a certain amount of funds, the scammers execute the last phase of their plan and abandon the project, taking with them the full funds. Investors are left with worthless tokens and, more often than not, no way to get their money back.
Want to know more about other scams crypto enthusiasts can fall victim to? Find our full series of articles here.
Research to be carried out on crypto projects to avoid rug pulls
One of the golden rules of investing is to systematically conduct your own research before investing in anything. Here are some useful tools that will help you check whether that new project that catches your eye is a legitimate investment opportunity or a scam all round.
1. Block Explorers
Tools like BSC Scan and Etherscan allow you to search for the address of a token and access crucial data, such as the number of its holders and transactions it has undergone. Stay tuned for these clues:
The majority of tokens are held in few wallets, or even just one.
Developers withdrew funds from the liquidity pool.
A large amount of tokens was suddenly transferred from the project wallet address to an exchange platform.
Screenshot of Etherscan
2. Other online tools
Don't limit yourself to block explorers when doing your research and don't hesitate to use additional online tools, for example RugDoc, which analyzes project code for possible scams. Any risky tokens it finds are flagged on its website and rated based on the level of risk they present. Token Sniffer is another useful tool that performs an audit on tokens by analyzing their liquidity, contracts and possible similarities with other fraudulent projects.
Screenshot of RugDoc
Disclaimer: Using these tools can be helpful in verifying the legitimacy of a token, but remember that they do not offer you any guarantee of your investments. Always conduct your own research and carefully manage your risks when deciding to invest.
What to do if you have been the victim of a rug pull
Withdraw your money. If you still have the chance, withdraw your funds as soon as possible: this could avoid further losses.
Cease all investment. Do not contribute any more funds to the project, even if the criminal tries to make you believe that the project is real when it has been proven to be fake.
Report the project. If you found the project on social networks or if its manager sent you the first message through these channels, report its profile to the moderation team of the network in question.
Report the scam immediately by following the steps in How to Report a Scam to Binance Customer Support? Contact law enforcement and provide them with all the necessary details, including all the information you have collected, including your interactions with the scammer. Binance works closely with law enforcement authorities, which regularly unmasks criminal groups and recovers stolen funds. Although it is not guaranteed that you will recover the lost money, in the majority of cases this is the only means available to you to try to find your belongings.
For more information
How to Survive Scams: Fake Crypto Investments to Be Wary of
How to Survive Scams: The Red Flags of an Imposter Scam
How to Survive Scams: Fake Job Offers to Be Wary of
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